Southern Fields has an inventory of 838,000 pounds of sugar. The firm placed a partial hedge on this inventory by selling 6 futures contracts at 9.56. The futures contracts are based on 112,000 pounds and are quoted in cents per pound. At the time the firm sold the sugar, the spot rate was 9.63. How much profit did the firm lose because of the hedge?
A)$470.40
B)$586.60
C)$688.20
D)$4,704.00
E)$5,866.00

Question

Quizplus · Accepted Answer

The firm hedged its sugar inventory by selling futures contracts, which means it locked in a selling price for the sugar at the time of the hedge. The difference between the futures price (9.56 cents per pound) and the spot price (9.63 cents per pound) represents the profit lost due to the hedge. The difference is 0.07 cents per pound. Since each contract is for 112,000 pounds, the total loss per contract is 112,000 pounds * $0.0007 = $78.40. With 6 contracts, the total loss is 6 * $78.40 = $470.40.

Southern Fields Has an Inventory of 838,000 Pounds of Sugar